Measures for Pre-tax Deductions from Income Tax for Enterprises
Guo Shui Fa  No.84
To： the bureaus of state taxation and local tax bureaus of each province，
autonomous region， municipality and the cities under separate state
planning：（The circular is omitted）
Measures for Pre-tax Deductions from Income Tax for Enterprises
Chapter I General Provisions
Article 1 These Measures are hereby formulated in accordance with
the Interim Regulations of the People's Republic of China on Income Tax
for Enterprises （the "Regulations"） and implementing rules thereof （the "Rules"）。
Article 2 According to Article 4 of the Regulations， the balance of
total annual income to the taxpayer in each tax year less the allowed
deductions shall be the taxable income. The allowed deductions mean all
necessary and normal costs， expenses， taxes and losses of the taxpayer in each tax year arising in connection with the acquisition of taxable
Article 3 The deductions declared by the taxpayer shall be true and
legitimate. Truthfulness means the evidence is available that related
expenditure has arisen. Legitimacy means conformity with the state tax
regulations. In case of discrepancy between other regulations and the tax
regulations， the latter shall prevail.
Article 4 Unless otherwise stipulated by the tax laws and
regulations， the confirmation of pre-tax deductions shall comply with
the following principles：
（1） Accrual basis principle： The taxpayer shall confirm the deductions at the time when the expense accrues rather than at the time of
（2） Matching principle： The expenses of the taxpayer shall be declared for deduction in the period when the expense shall be matched
or distributed. The deductible expenses that the taxpayer shall declare in a
certain tax year shall not be deducted earlier or later.
（3） Principle of relevance： The expenses that the taxpayer may deduct shall be relevant to the taxable income in nature and at root.
（4） Principle of certainty： No matter when the deductible expenses of the taxpayer are paid， the amount shall be certain.
（5） Principle of reasonableness： The computing and distribution methods for the deductible expenses of the taxpayer shall comply with
the general operating rules and accounting practices.
Article 5 The expenditure of the taxpayer must be strictly divided
into operating expenditure and capital expenditure. Capital expenditure
shall not be directly deducted in current period， and instead it shall be depreciated， amortized in several periods or recognized in the costs of
存档所用，请勿外传，下载后请在24小时内删除。版权归原作者所有。 related investments in accordance with the provisions of tax laws and
Article 6 Except for the provisions of Article 7 of the Regulations， the following expenditures shall not be deducted from the taxable
（1） Illegal expenditure such as bribe；（2） Fine， penalty and overdue fine paid for violation of laws and administrative regulations；（3） Provision for impairment of inventories， impairment of
short-term investment and impairment of long-term investment， risk reserve funds （including investment risk reserve fund）， and any other reserves other than those set aside in accordance with state tax laws and
regulations；（4） the part in excess of the statutory deduction scope and
standard （proportion or amount） specified by tax laws and regulations.
Article 7 The confirmation of the costs of such assets as inventory， fixed assets， intangible assets and investments of the taxpayer shall
comply with the historical cost principle. In case of restructuring of the
taxpayer， including merger， split-up and capital structure adjustment， if the potential appreciation or losses of related assets have been
confirmed and realized in tax payment， the cost of related assets may be
determined according to the appraised value.
Chapter II Cost and Expense
Article 8 Cost means the cost arising from the taxpayer's sales of
存档所用，请勿外传，下载后请在24小时内删除。版权归原作者所有。 commodities （including products， materials， leftovers， waste products and old and waste materials）， provision of labor services， and transfer of fixed assets and intangible assets （including technology
Article 9 The taxpayer shall reasonably divide the cost arising from
operating activities into direct cost and indirect cost. Direct cost means
the direct materials and direct labor in the operating cost that may be
directly stated for related cost computing objective or labor. Indirect cost
means the joint cost of services provided by several departments to the
same cost objective or the joint cost of the same input that may
manufacture and provide two or more products or labor services.
Direct cost may be directly included in the operating cost of related
cost objective or labor service according to relevant accounting vouchers
and records. Indirect cost must be reasonably allocated to related cost
objectives according to the cause and effect between cost objectives and
the output of cost objectives.
Article 10 The inventories of the taxpayer shall be priced at the
actual cost when it acquires them. The actual cost of inventories
purchased by the taxpayer includes purchase price， purchase expense and tax. T ax included in the inventory cost means consumption tax， customs duty and resource tax paid for purchase， production or entrusted processing of inventories and the input value-added tax （VAT） that can
存档所用，请勿外传，下载后请在24小时内删除。版权归原作者所有。 not be deducted from the output VAT.
The cost of inventory production by the taxpayer includes such
indirect expenses as manufacturing expense.
Article 11 The taxpayer may adopt the pricing methods， such as individual pricing method， first in， first out method， weighted average method， moving average method， planning cost method， gross profit margin method or retail price method， for outgoing inventories. In case
of discrepancy between the inventory process used by the taxpayer and
the last in， first out method， the taxpayer may also confirm the cost of
outgoing inventories by the last in， first out method. If the taxpayer
confirms the inventory cost or selling cost by planning cost method or the
retail price method， it must carry forward the cost difference or the
margin between the selling and purchasing prices on merchandise at the
time of year-end declaration of tax payment.
Article 12 The cost computing methods， indirect cost distribution methods， inventory pricing methods of the taxpayer shall not be changed
once they are confirmed. If the change is necessary， the taxpayer shall apply to the competent tax authority for approval before the beginning of
the next tax year. Or the tax authority shall have the right to make
adjustment if the taxable income is affected.
Article 13 Expense means the selling expense， administrative expense and financial expense that the taxpayer occurs in each tax year
存档所用，请勿外传，下载后请在24小时内删除。版权归原作者所有。 and may be deductible， except for the expenses that have been included
in the cost.
Article 14 Selling expense means the expenditure arising to the
taxpayer for sales of commodities， including advertising expense， transportation expense， loading and unloading expense， packing expense， exhibition expense， insurance premium， sales commission （adjustment of commodity purchase price cost for the import
commission able to be directly confirmed）， handling charge for agency
sales， operating lease fee， traveling expense of marketing department， salaries and welfare expense.
Such commodity purchase expenses as the packing expense and
transportation expense arising to the taxpayer engaged in commodity
circulation for the purchased inventories before being warehoused， insurance premium and loading and unloading expenses arising in course
of transportation and storage， reasonable losses in transportation， and selection and clear-up expenses before warehousing may be directly
included in the sales expense. If the taxpayer has included the said
commodity purchase expenses in the inventory cost according to the need
of accounting， it shall not declare the deductions repeatedly in the name
of sales expense.
The sales expense of the taxpayer engaged in real estate
development also includes the refitting and repair expense， maintenance
存档所用，请勿外传，下载后请在24小时内删除。版权归原作者所有。 expense and heating expense occurring before sales of the development
If the sales expense of the taxpayer engaged in post and
telecommunications has been included in the operating cost， it shall not be included in the sales expense for deduction again.
Article 15 Administrative expense means the expense arising to the
administrative department of the taxpayer for provision of various
supporting services for management and organizing of operating
activities. Administrative expense shall include the head office
（corporate） outlay borne by the taxpayer， research and development
expense （technical development fee）， social security contribution， labor protection expense， business entertainment fee， trade union fee， staff education outlay， expenses of the shareholders' meeting or board of
directors， amortization of start-up expense， amortization of intangible
assets （including land use fee and land loss compensation）， mineral resource compensation， bad debt loss， stamp duty， fire fighting expense， pollutant discharge fee， afforestation fee， foreign affairs fee， legal， financial， material processing and accounting affairs costs
（consulting fee， legal cost， fee of engagement of intermediary
agencies， trademark registration fee）， and reasonable administrative
fees relevant to its for-profit activities paid to the head office （the head office of the same legal entity in the nature of headquarters）。 Unless
存档所用，请勿外传，下载后请在24小时内删除。版权归原作者所有。 with approval of the State Administration of Taxation or its authorized
tax authorities， the taxpayer shall not recognize the administrative
expense paid to its affiliated enterprises.
The head office outlay， also called corporate outlay， includes the salary， welfare fee and traveling fee of the administrative officers of the
head office， and the office fee， depreciation expense， repair expense， material consumption and amortization of low-value consumables.
Article 16 Financial expense means the expense arising from
raising of operating funds， including net interest expense， net exchange loss， handling charge of financial institutions， and other non-capital expenditure.
Chapter III Payroll Expenditure
Article 17 Payroll expenditure means all the labor compensations
in or not in cash paid by the taxpayer to the employees hold positions in
or have employment relationship with the taxpayer in each tax year， including base salary， reward， allowance， subsidy， year-end salary increase， overtime salary and other expenditures concerned.
Regional subsidy， commodity price subsidy and lunch subsidy shall
be treated as payroll expenditure.
Article 18 The following expenditures of the taxpayer shall not be
treated as payroll expenditure：
（1） Dividends paid to employees for their investment in the
存档所用，请勿外传，下载后请在24小时内删除。版权归原作者所有。 taxpayer；（2） Social security contribution paid by the taxpayer for
employees according to provisions of central or provincial governments；（3） Various welfare expenditures （including employee living
allowance and family-visit traveling expense） paid out of the staff
welfare fund；（4） Various labor protection expenditures；（5） Traveling expense and setting-in allowance for work transfer of employees；（6） Various expenditures for retirement and resignation of employees；（7） The only-child allowance；（8） Public housing reserve fund
assumed by the taxpayer；（9） Other items that， according to the State Administration of Taxation， do not belong to the payroll expenditure.
Article 19 Employees holding positions in or with employment
relationship with the enterprise include regular employees， contract workers and casual laborers with the exception of the following cases：
（1） The employees of the clinic， staff bathroom， hairdresser's room， kindergarten， nursery school that shall be charged to the staff
welfare expense；（2） The retirees， laid-off workers and post-waiting
workers who have received pension and unemployment benefits；（3） Administrative service persons of the houses sold or leased with
rent income included in the housing turnover fund.
Article 20 Unless otherwise stated， payroll expenditure adopts tax
salary deduction methods， with taxable salary deduction standards
referring to the provisions of the Ministry of Finance and the State
Administration of Taxation.
Article 21 The salaries paid to employees by the taxpayer which
adopts the performance-linked salary measures and the salaries paid by
the catering service industries from retained profit may be deducted
according to the actual payment.
Chapter IV Asset Depreciation or Amortization
Article 22 The depreciation expense of the fixed assets and the
amortization expense of intangible assets and deferred assets used by the
taxpayer in operating activities may be deducted.
Article 23 The pricing of fixed assets of the taxpayer shall conform
to the provisions of Article 30 of the Rules. After confirmation of the
value of a fixed asset， it shall not be adjusted unless in the following
special cases：（1） Asset liquidation and capital verification required by
the state；（2） Dismantlement of a part of the fixed asset；（3） If the
fixed asset has been damaged perpetually， with approval of competent authority， the value of the fixed asset may be adjusted to the recoverable
value and the loss shall be recognized；（4） Adjustment of the original valuation based on the actual value or finding mistakes with the original
Article 24 The depreciation scope of fixed assets of the taxpayer
shall conform to the provisions of Article 31 of the Rules. Unless
otherwise stipulated， no depreciation or amortization shall be made for